Refinancing can be useful for many reasons, but the intent is always the same: save some money, either in the short term or in the long term (or both, right?) Whether you’re looking to save some cash in the long run, or just loosen up your day to day budget, car refinancing might be the right move for you.
Here we discuss the top three reasons you should consider refinancing today.
Reason #1: You Can Get a Lower Interest Rate
There are a number of reasons why you might be able to secure a lower interest rate. And if this is the case, it is absolutely worth looking into vehicle refinancing. A lower interest rate can reduce how much you will end up paying in total on your car, as well as reduce your monthly payments. And who couldn’t use some extra cash every month? Let’s look at some reasons you might be able to secure a lower interest rate.
Your Credit Has Improved
Your credit score is the biggest factor in determining an interest rate. Credit scores help lenders to gauge how likely you are to repay the loan they are giving you. Let’s look at how credit scores are calculated, and how changes in your finances affect your credit score.
- 35% Credit History (On time, consistent payments)
- 30% Credit Utilization Score (Your total debts divided by the total credit available to you)
- 15% Credit History Length (The age of your accounts)
- 10% Credit Mix (How diverse is your credit portfolio)
- 10% New Credit (New accounts and credit inquiries)
A change in any of these areas can result in a change in your credit score. Say it has been two years since you took out your original loan. Since then, you have made every single payment, not only for your auto loan but for your mortgage and credit cards. You made a budget and stuck to it, and it paid off. This can offer a major boost to your credit since credit history accounts for 35% of your score. Maybe in those two years you also paid down your credit card debt significantly and reduced your credit utilization score from 50% to 25%. This shows financial maturity and makes you a very desirable loan candidate. An improvement to your credit score can translate to saving hundreds if not thousands of dollars.
So what is a good credit score to refinance? A good credit score is considered to be 670 and above. As long as your score is better now than it was when you originally took out your loan, it is worth looking into.
Check your credit score (it’s free to do once a year from each of the three agencies, which means you can check for free three times each year). If you have noticed an increased score, contact Auto Approve and let’s get the ball rolling on refinancing.
*Pro Tip: When you get your credit report, check for any inconsistencies. Be thorough when you are reviewing, and report any issues to the credit agency. Catching any mistakes can have huge effects on your credit score!
Interest Rates Are Down
The economy dictates how interest rates are calculated. Interest rates are set at the federal level by the Federal Open Market Committee (FOMC). If the economy needs a boost, the Committee will lower interest rates to encourage spending. In these unpredictable COVID times, interest rates have been lowered to encourage people to buy.
Your Original Loan Had Unfavorable Terms
It’s happened to a lot of us; we go in to take a look at something and before we know it we are signing on the dotted line. Maybe you just wanted to see how that new SUV looked in person, or you were just hoping to take a quick test drive and get a feel for how that new truck drives. If this is how you got roped into your original car loan, refinancing might be an excellent idea.
Dealerships have famously high interest rates and notoriously smooth salesmen. It is easy to get talked into a loan without shopping around and comparing rates. If this has happened to you, there is a good chance you are overpaying on your car loan. Vehicle refinancing can help you pay off your unfavorable loan and start over with a better, more reasonable loan. At Auto Approve we don’t have any smooth-talking salespeople (don’t tell our team we said that though). We are just really passionate about saving you money.
Reason #2: You Want to Change Your Monthly Payments
Vehicle refinancing is a great way to change your monthly payments. If things have been especially tight lately, there are two ways that you can get some much needed breathing room.
Refinance to a Lower Interest Rate
If your credit score has improved, interest rates have gone down industry-wide, or your original loan had a high rate, there is a good chance you can refinance to a lower interest rate. This will ultimately reduce your monthly payments if you keep a similar payment schedule.
Lengthen Your Payment Period
A great way to reduce your monthly payments is to lengthen your payment period. When you refinance, you may have the option to pick 24, 26, or 48 month repayment periods. The longer your payment period is, the more spread out the total cost of the loan will be, which means your monthly payments will ultimately be less. If your interest rate isn’t much lower you may end up paying a bit more in the long run interest rates, so you will need to decide if the extra breathing room is worth the possible long term cost.
Shorten Your Payment Period
If your financial situation has loosened up since you took out your original loan, shortening your payment period might be a good move to save some money in the long run. The shorter your payment periods are, the less time you will be paying interest on the loan. This can add up to saving big bucks when your loan is over. Your monthly payments are likely to be a bit higher, but if you are in a comfortable position it might be a good move to pay your loan off more quickly. And if you are able to secure a lower interest rate at the same time, that’s even more money in your pocket.
*Pro Tip: Doing your research and running the numbers is the most important thing you can do when considering refinancing. Make a spreadsheet and use an amortization sheet to help you determine your various payments based on different payment periods. This will let you see how much you will be saving (and then decide if it’s worth it).
Reason #3: You Want to Add or Remove a Cosigner
If you want to add or remove a cosigner to your auto loan, you will need to refinance your car.
Adding a Cosigner
If you are having trouble each month making your loan payments, adding a cosigner might be beneficial to you. If they have a good credit score and payment history, they will likely qualify for a better interest rate. In order to add a cosigner, you must go through the vehicle refinancing process. When you refinance with a cosigner, lenders take the following considerations into account:
- Your cosigner’s credit score
- Your cosigner’s payment history
- Your cosigner’s income
- Your cosigner’s background
- Your cosigner’s consent to be financially liable
Pro Tip: It can be difficult to ask someone to cosign on a loan as it is a huge liability. The key to successfully cosigning is to communicate openly and honestly with your cosigner. Check in with them regularly to assure them that you are making consistent, prompt, and full payments. Give them access to any necessary documents and keep them in the loop.
Removing a Cosigner
Similarly, if you are no longer interested in having someone else’s name on your loan, you will need to refinance to get them removed from the loan. Make absolutely sure that you are comfortable taking on the responsibility by yourself before you remove your cosigner. Consider the following:
- Has your credit score improved enough to support this and give you a good interest rate?
- Is your cash flow good enough to support consistent, full, and on-time payments?
- Does your current loan have prepayment fees? Are these fees high enough to negate any benefits of refinancing?
- How much time left is in your current loan? If there are less than two years left on the loan, it might not be beneficial to refinance, and it might make more sense to leave the loan as is until it is paid off. On the other hand, if your loan is less than a year old it might be worthwhile to wait a bit. Waiting a year after your original lease to refinance will help your credit score to bounce back after taking out the initial loan.
Those are the top three reasons that you should think about refinancing today.
Have we convinced you that car refinancing might be a fantastic and worthwhile idea? Great! Wondering how to refinance a car loan? Get started with a free quote from Auto Approve today–it only takes a few minutes, so you have nothing to lose!